Something a lot of people say in real estate is, “Cash is king.” What does it mean? Well, for an investor, it means that having funds readily available without debt hanging over your head has a couple of huge advantages. And if cash is the king, cash flow is definitely the queen. One of the reasons people invest in real estate is to get a regular flow of cash going. Investing in real estate with cash is less risky, and since it’s a readily available recourse, it provides flexibility, stability, and basically forms a solid foundation for your portfolio.

The two basic goals of investing are 1) to make sure that what you have isn’t lost and 2) to grow wealth. Putting your cash into real estate typically does just that. Investing is, and always will be, a risk-based approach to making money. People don’t like taking risks, and that simply means most investors look for stability and risk mitigation when investing. Check this out for an awesome stat: The National Association of Realtors’ research on cash sales estimates that about 30 percent of residential sales are pure cash transactions.

In cases like this, there’s nothing like an example to make a solid point. Say you buy 3-4 properties in a place like Ohio and put them up for rent. If you made your purchase directly with cash, your yearly net return would be around $24,000. This amount is close to half the yearly salary in the U.S. This nice stream of cash flow is all yours to keep. Now, imagine having a loan out for the same amount of properties. The numbers would look substantially different. Say, a property on the West coast of the US is available for $200,000. You go to a bank, ask for a loan, and then pay a total interest of $165,000 spread over 30 years at a loan interest of 4.5%. Sure, as you pay your monthly interest, you’ll probably not even notice it. Spread over 30 years, it usually comes down to a small monthly cost. But ultimately, you pay a big sum. That’s why buying a property with cash is such a favored approach for many real estate investors.

Note: I’m definitely looking forward to some heat from the example above, but please don’t be a keyboard cowboy. 🙂

But that’s not all—even if the market is taking a downturn or you simply have a slight cash flow problem, you are safe. After all, you don’t have any loans, and there’s no bank asking for a mortgage payment every month. You most probably have someone renting your property, generating a steady cash flow. Things like value of property going down during recession won’t matter to you, as your property is already rented out.

How to Analyze a Real Estate Deal

Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.

Getting a Mortgage is Difficult

These days, getting a mortgage is a difficult and cumbersome process. Apart from a thousand documents that need to be filled in and pieces of evidence that need to be provided, even the approval process takes a lot of time.

Home sellers prefer quick and hassle-free sales. Even if the investor is pre-approved for getting a mortgage, he could still be denied later on. Lenders are likely to drop any funding for real estate investors based on the home appraisal value. If that value doesn’t reach the same value you have agreed to pay for the property, lenders will not hesitate to pull out. Sellers often simply avoid buyers who have to apply for a mortgage. It’s also something that our company has recently implemented, as the loan process on most of our transactions has been long and painful.

It’s obvious that this isn’t a problem for investors who invest with cash. These buyers, who approach a seller with hard cash, don’t have to go through all the drama, and the seller knows that the deal is not going to be too difficult. And this alone gives the buyer some additional negotiating power. That means better prices, but also lower closing times.

Risk Mitigation With Cash Purchases

Related to the first point, home appraisals can be quite fickle, depending on the price of properties in the neighborhood. Lenders often assess the value of a property by making a comparative analysis with other houses in the neighborhood. If a few of them are sold at a lower price, the lender may also lower the amount he’ll loan you. Now, that might seem fair to you; after all, no lender should have to take on too much risk. The issue arises when appraisers make low ball estimates. It’s not uncommon for them to value a property too low, with negative consequences for all parties.

You can, of course, challenge a home appraisal, but that just means more hassle and a longer time before a deal can be struck. And that means that one of those “cash is king” investors can swoop in, offer the money the seller wants, and you’ve lost a great opportunity. When you’re buying a property with cash, you can really take advantages of situations like this. Unfortunately, I’ve seen too many appraisals go south due to estimates that make no sense. I have also personally been involved in a triple appraisal process due to the appraiser not liking one of my employees, and thus I ended up re-ordering for a new appraisal three times over. What a joke…

A Sense of Security

When you are putting your hard earned money into an investment, you can look forward to a certain peace of mind. Owning your house or any other property with a cash purchase gives you a much needed sense of security. You don’t have to worry about monthly payments when you’re facing financial instability. Also, if an emergency occurs that requires money, you know you have a completely owned property that you can sell any time.

Apart from buying through hard cash, there are also other ways of buying indirectly through cash. Two popular ways of using cash purchases for real estate investments include a self-directed IRA or/and a HELOC.

Self-Directed IRA (Individual Retirement Account)

This is an interesting one. Many people have an IRA; in 2013, four out of every ten households had one. That’s quite a lot, which makes sense because there’s very little risk involved and the portfolio is managed by someone else. Normally, money in an IRA is invested in either the stock market or a mutual fund. But there’s also something called a self-directed IRA. It’s far lesser known, but it presents some really nice opportunities to savvy investors.

All that money would just be sitting there, making small gains every year, if it weren’t for the SDIRA. This setup allows you to decide yourself how you’ll be investing your money. And under the Employee Retirement Income Security Act of 1974, investment in real estate through an IRA is completely allowed. So now you can re-purpose the money to actually start making you some additional cash on a monthly basis.

But that’s not all. There are a number of other benefits of using an SDIRA for investment purposes. Income generated from an IRA is tax-free. So, the income comes out as absolute profit. There are also no time limits for holding on to property. You can use that SDIRA both for flipping properties, as well as for investment purposes, so you can purchase rentals.

HELOC: Home Equity Line of Credit

Many people might confuse the HELOC with a normal loan, but although it has some of the same mechanics behind it, there’s quite a difference. To make use of it, you need to own a home already. What you can do then is get a line of credit using your home as collateral. You’ll get access to a sum of money that you can then use for a certain purpose of your choosing. You will have to pay a certain amount of interest, but you’re not paying the money back immediately. That payback only occurs later, after a predetermined period, which could range from 5 years to 20 years or even more.

This makes a HELOC a good way to purchase properties. It offers investors flexibility and upfront access to cash to make repairs or even flip. This means that you won’t be dealing with pesky gun-shy appraisers messing with your deals, and you’ll have the opportunity to use the money with the same flexibility as a normal cash investment. My fellow Aussies have a ton of equity in their personal places of residence now, with the median house price in Sydney at $1M. In my opinion this is an ideal situation to utilize a HELOC and invest in high net cash-flowing investment properties.

Save Cash and Buy Outright

Buying a house with cash is one of the easiest ways of investing with very little risk attached. For many, cash purchases seem a distant dream. However, if you save properly, you’ll be amazed that you’ll be able to actually invest with cash. Just make sure you’re not overreaching and keep within your predetermined budget.

If you have access to a very limited amount of cash, look for properties in suburban areas that yield good rentals or focus on those you can flip easily. This is exactly how I first started, working hard and being frugal. I saved my first $50,000 and was on my way. Here we are today, with over 300 deals under our belts, owning a million dollar real estate investment company.

Do you pay cash for your properties–or would you rather use other methods?

Weigh in with a comment!

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About Author

Engelo Rumora “The Real Estate Dingo” is a successful property investor, motivational speaker and serial entrepreneur that quit school at the age of 14 and played professional soccer at 18. He is also a soon to be published author along with becoming a TV personality in his very own real estate house flipping show. To find out more go to engelorumora.com . Engelo Rumora has been involved in over 400 real estate deals and founded five businesses in Ohio. The most successful is Ohio Cashflow, a company that specializes in providing turnkey properties in several Ohio markets. The newest venture is List’n Sell Realty, a real estate brokerage based in Toledo, Ohio and soon to be known as the #1 discount broker in the country.

42 Comments

Interesting perspective. I bought few condos in RI area and this is good time to make use of cheap money available via banks (even though its real pain in the ass to go through that process :-)). I would love to buy property on cash but if I go with that strategy I might be able to buy 1 not 4+. I agree cash is king but would love to make leverage my queen :-). Good blog though

I respectfully disagree 100%. Here are a few points to counter your argument:

Getting a Mortgage is Difficult: Getting a mortgage is very easy. Especially from a portfolio lender. I have a lender that tries to throw money down my throat. You don’t need credit to get a mortgage. Only a small track record.

Risk Mitigation With Cash Purchases: I have never once seen an appraisal kill a deal. If we are investors we buy at discounts or close to it. I can see some ghetto houses getting a bad appraisal. Then again, I would never buy out there nor get a mortgage on them. Definitely wouldn’t pay cash either. Those houses get destroyed. I also wouldn’t ask a bank to lend on them, they wouldn’t. And at that point, the bank just did you a huge favor.

A Sense of Security: This is correct, no mortgage payment. However, you still have taxes and insurance so you do have a monthly payment.

Self-Directed IRA (Individual Retirement Account): I would never give up depreciation deduction. You can invest in real estate (and use the money for toys throughout the year:)) and not pay a dime in taxes if done right. Rental Real Estate is already equal to a tax deferred account IMO. The cash reserves in this type of account are appealing though. However, I will leave that money in there as my reserves for leveraging. Flipping a house wouldn’t be a bad idea here. I would never buy a rental using this account.

HELOC: Home Equity Line of Credit: ahhh, you are using mortgages. I use these all of the time to fund my next down payment to buy houses with 100% leverage. This is not cash.

Save Cash and Buy Outright: Huge mistake and you will get better returns in the stock market with 0 work. I would argue that buying one house outright with all of your saved money is way more riskier than buying say 3-4 houses all leveraged with 20% down. You will have more cash monthly than the (1) all cash purchase. Let alone the principle buy down, better tax savings, appreciation on 4 properties etc. I would never recommend buying “rental real estate” with all cash. Why would anyone do that? I would rather invest in bonds.

Using leverage will make you between 20% and 100% cash on cash return. That is real estate. Paying cash is typically 5% to 15%. In some instances more can be obtain, however, you wouldn’t want those properties. Trust me!!!

I have owned houses in the ghetto (20-30k) and in normal houses in the 100k range that rent for 1,300-1500. In every event the cash flow is better on the 100k leverage homes. You have a mortgage and monthly cash flow is more than a house that is owned outright. Crazy, huh. Every-time the math works out to this. Also, you get principle buy down on the property, better tax savings, and more appreciation. — Those are all the advantages of real estate in the order from greatest to least greatest.

Are you saying you DO use A HELOC? I have a Multi-use property with a LOT of Equity. I would like to use some of it to purchase other property. Is it pretty easy to get a HELOC? What are the terms, closing costs & rates on these usually. Can they be “called in” any time? Are the HELOCs Tax deductible?

Ill start it. Its interesting what is riskier, all cash in or all cash out carrying a large mortgage. I believe you stated it was safer to be all in cash on a house, but in my opinion if you care about growing your money then you need more appreciation right? And on top of that, if like you stated, a recession hits and prices fall, you just lost capital.

Ive been in too many stocks that paid a nice dividend and then went south and cut that dividend, meaning im left with a smaller divy and capital loss. Real estate offers the ability to recycle money fast.

I have one rental all in cash and its a wonderful feeling not having to pay a mortgage, but to get all my cash back out ill be waiting 10 years. A lot can happen in 10 years.

For people that care about net worth it seems dauntingb to want to leave all their cash in.

Disagree as well. First off, if you buy all cash when you can get a loan at sub 5% that means you are implicitly assuming that your money is only able to earn 5% because otherwise you should get the loan (i.e. if you returns can be greater than 5% you should pay % for someone’s money and use it to buy at higher returns). My opinion if you think you can only earn 5% you should not be investing and if I had $200K and bought one of your properties I would hope you would think I can earn higher returns spread out over a number of properties.

Second, appraisals do suck we all know that but at least on my HELOC you still need one (if you have someone that gives you HELOCs with out it I would love to know who) and you may disagree with appraisals but the end buyer that everyone hopes for when cashing out is a retail buyer and I don’t know many retail buyers that buy cash unless it is a crazy deal.

That is not to say there is not a time for cash (for instance if you get a big discount or are betting on increases in value) or if someone’s preference is just to use cash that its a bad idea because it helps them sleep at night. However, to say this is a good strategy I think is a rough argument.

My thoughts exactly. Maybe in a high interest rate environment, all cash purchases make sense. But certainly not in today’s low interest rate environment. To lock in these rates for 30 years is an extremely competitive advantage that shouldn’t be overlooked.

Additionally, I’d take the position that all cash purchases are MORE RISKY than leveraged purchases. Not only are you tying up your capital in a relatively illiquid investment at a low return (since no leverage is being used), if you get sued, you now have capital equal to the full purchase price exposed to the suit (assuming you are using an entity) instead of 10-25% of that capital.

If you ever have to declare bankruptcy, it’s much easier (emotionally) to part ways and fold an entity that has $20k of your capital rather than $100k (assuming the cash purchase was $100k for illustration purposes).

I like articles like this because the spur a discussion, so good job Engelo. But I think the “all cash purchases” argument aligns more with a non-real estate investor who doesn’t understand finance, economics, and utilization of leverage.

I think people just have the need to feel safe and assume that a all cash position is best. I have been buying my houses with 20 to 25% down and let the renters do the rest.

If I wake up one day and find a bunch of equity. I plan to refinance and take the money tax free. If my renter falls into a bucket of money and wants to buy the place, Its market value and off to a 1031 exchange. Terry j

Its interesting because this article sparked me too bring up a point with a non real estate investor at work who is tired of the stock market. I said “i bet the best investors in the world almost never use their own money”. I was met with criticism and then their examples only priced my point. I wonder what buffett really does. I don’t follow him real close but id bet he uses other companies he owns as collaterol or uses investors (stocks, bonds etc) to raise cash to go buy companies like heinz. I would doubt he reached into his savings account or his other business’ savings to buy a company. It seems like banks and big business use everyone else’s money all the time.

You’re spot on. I read Buffet’s biography and a lot of other books on him. He started with his own cash mingled with cash from neighbors, family, and friends. He literally went door-to-door asking for OPM (other people’s money).

In the first decade of investing, he realized that his fund could grow much faster by buying businesses that threw of cash (insurance premiums became his favorite, which is why he owns Geico), investing the cash for higher returns, and paying customers lower returns (death benefits).

In addition to Geico, he bought other companies, let the management teams keep running them, pull cash out of the business, invest a higher return, then repay the business.

Tired of the stock market? Let’s see how tired you will be when you get into Real Estate.

Stock market has been obliterated here on BP mostly by the people who don’t have a clue what investing in public companies means.
Investing in the “market of stocks” has been good for me and plenty of people who know how to control emotions and who recognize that shares are not little numbers that jump around in the paper every day. The key is to realize that shares represent a partnership interest in a real and ongoing business, a business that earns a decent profit, shares that profit with you, and grows the amount of profit shared on an annual basis. Investing is about being a partial owner of a real business.

Just a food for thought here. I see many folks saying finance is the way to go but I think that could just be because cash is not an option. Meaning the pockets aren’t deep enough and only other way of getting into the market is by borrowing.

Working long and hard and saving enough Ka Ching is just too tough for many. Its the “millionaire overnight” attitude.

So its something like my Green Chrysler is better than your blue BMW just because I have a Green Chrysler and its cheaper on gas.

Ok my terminology sucks but you might get the point.

I have biz partners with $10s of millions of dollars that haven’t touched loans and don’t intend to do so. They started with zero and worked their way and weathered every market downturn. I personally have money thrown in my face all day and everyday. Still won’t touch it.

Might look into it over the next 6-12 months tho but am looking for really fat cashflow before I look any further.

Its a slow, but much much safer way of investing IMO.

Maybe the fact that all Aussie loans are recourse so if you [email protected]#% up there your life is gone haha

I mean if you are financing because you don’t have cash and really have no way to get it that could certainly be a big problem because you don’t have reserves and there is definitely over leverage if you can’t hit speed bumps and come out ahead.

However, I am not sure I understand the rest. If you buy a property all cash there is no recourse but you already put all the money in so you basically pre-funded the recourse. If you get a loan I can’t think of many situations where your liability would exceed what you would have put in as a cash investment except maybe getting sued but that is more asset protection and could be done with loans they are just more expensive.

What you lose out on though is the diversity of buying. Not if you have $10MM obviously but if you just have $100K how many homes can you buy with cash? No matter how good your PM there will be problems and I see as having a number of homes means it is unlikely you have problems at each home unless you PM or buying strategy is off. So risk goes down with more properties.

Good discussions. I was outbid by an investor with “all cash” offer even though his offer was $5K lower than mine. Go figure! If I knew it will happen, I would have probably offer cash as well since I was trying to leverage. So, I lost out a good duplex rental to a Cash offer.

Here is my take:

Cash: Pro-> You can outbid other bidders and close quicker. Lower closing costs and less heartache (underwriter can pull few last minute surprises- I have faced it and got angry since they don’t ask everything upfront and having to explain every large deposits etc.). In a down-market or facing rental applicant shortage don’t need to lower the criteria to get tenants in and to get cash flow going or face mortgage payment issue with banks.
Cash: Con -> Tied-up into non-liquid. Can’t scale it up quickly (biggie!). If u get sued, unless in a series LLC, all of your properties cash is exposed (insurance Co umbrella policy may balk ..u never know until it happens..).

SDIRA- Little bit new concept to me but not sure why depreciation is a question here since all the income/profit is tax protected anyway unless…? Even depreciation was a concern, you will have to payback at some % when you sell anyway (1031 is not always avail bec of market or property avail issue etc.). In a bad market, highly leveraged properties will have hard time to refinance to get cash out (as an option)..

I think overall if you can save all of your money and not tie it up you have less risk. The reality is that you have to make your mortgage payment. If you never use your own money and finance everything 100% think about the reserve fund you will have. Always ready to make a payment during a vacancy. Paying cash doesn’t provide significant enough returns in real estate. Again, you could do nothing and get similar in the stock market.

You need to leverage in real estate to make it worthwhile. This only pertains to rental real estate IMO.

@Andrew,
Thanks for your inputs. Can you please elaborate on your comment ” I would never give up depreciation deduction” on the SDIRA? The reason is that I am thinking of using this route as the “Bald guy” mentioned earlier. Since the rent income/profit is tax protected (also protected for in case of a sue)…I would think this is a parallel investment option as opposed to one replacing the other..

A couple of thoughts here…I think it was @ENGELO RUMORA that swerved into an important moral argument that is seldom discussed in REI it seems. That is the concept of “paying what you owe”, so when people “leverage OPM” in essence what they are alluding to is the concept that if things go bad for the investor (after sometimes many years of cash flow heaven) they just walk. Not that there are no consequences at all for walking away but not the same as losing a property you paid for with all cash (because of some catastrophic event). But there is something to be said for the moral standard of honoring your financial commitments no matter who loaned you the money. I have seen a lot of discussions on BP about doing deals with private investors and the constant refrain is to pay your investors back first and according to the returns you promised, whether you make money or not! Is a bank not an “investor partner” as well?
Secondly, (please consult your attorney & CPA; this is not legal or financial advice) one strategy for securing your “all cash” properties *might* be to set up a trust, personally loan the trust the money to eventually loan to your series LLC’s to purchase each individual property in it’s own LLC. Then *possibly* set up the notes to repay the trust (I’m using trust generically as there are many forms of trusts that this scenario may or may not work with) as “interest only” for as long as legally possible. The net effect is that if someone decides to sue an LLC the property will be mortgaged to the gills to the trust…making it a less desirable target.
Good discussion as I have purchased property both ways. The ones that have bank loans definitely keep me awake some nights as they are located in an oil dependent area/economy. The ones that I paid for in cash I know that in a worse case scenario I can at least rent it out for taxes & insurance!

I rarely comment on articles like this, but I felt the need to on this one.

I know that you own a turnkey company and that influences my perspective on this article. I think that leveraging money is great. I think that appraisals protect investors. Since you are trying to sell your properties as quickly and as expensive as possible, it’s in your best interest to have an all-cash buyer. Quicker close, and no appraisal contingency. For you, this is a no-brainer. Especially when you discuss the “bad appraisals.”

Honestly, this is what gives turnkey companies a bad name. I know you provide a great service, but come on, trying to sell houses above appraisal really hurts the investor and the exit strategy. The investor gets wooed by the cash flow, but you screw them on the sale price and exit strategy. I know you will disagree, but that’s also your job to.

I’ve purchased 4 turnkey properties already and am in escrow on a few more right now, so trust me, I like the turnkey approach for me. I have had bad appraisals and thankfully I have chosen to align with turnkey providers that have worked with me on the appraisals and didn’t quickly jump to another buyer or an all-cash buyer. They all came down to the house value, and we have always made it work. I encourage everyone on this forum to be very careful with who you trust and you choose to partner with.

Apart from my above points, you did have some good points in the article. Sorry to over shadow it with some of my more forward points.

To date we have not sold a property for more than what its worth unlike a ton of other turn-key operators out there.

Appraisals are also so easily influenced and due to this they don’t really protect the investor.

Also, my articles are written based on opinions, perceptions and experiences and not sell a product or a service. We actually turn down more business than we take on and our product and service sells itself.

To me, financing is never preferable. It’s wasted money any way you split it. If you were to purchase $100k for a place and rent it for $800 monthly, is that not 9.6% annually? Doubling your investment in 10 years or possibly less. Plus when you factor in taxes and fees, is it worth it? IDK, you have to be a mathematician to figure that out. But I know this, obligating to a 30 year loan is what’s risky